What is your savings rate?

Question

Happy holidays BP Nation! What a great year this has been for me and my investing! I bought another SFH rental in May and bought a live-in Duplex in November.  I wouldn't be where I'm at without the inspiration I've found here as well as the guidance.

One of things in my investing and planning that I really measure is my Savings Rate.  I initially came across this idea from Jacob Lund Fisker and the Early Retirement Extreme folks.  I read his book, and while some of it, no surprise, was a bit extreme, I gleaned some valuable information that I've taken with me into my investing world.  His premise, if you're not aware, is to get VERY aggressive with savings, like 80-90% of your income.

The ERE folks are very creative about living expenses and greatly reducing them.  So already looking at ways of cutting spending and living below my means, I started in REI a few years ago.  Another influential character was B Kyosaki and his Pay Yourself First idea, which I've been doing for a long time.  So without getting into my whole lifestyle and ways I've eliminated excess spending to boost savings (so I can invest!), I'll just talk in some round numbers.

I got serious about a Savings Rate number and started at ~20-25% net income, which at the time was $1200 (Savings Rate)/mon.  Later I boosted my SR to $1800/mon which was around 40%.  With my income from my rental properties and the large reduction in living expenses from owning a duplex, my monthly SR is ~$3000 (not including bonuses and commissions from W-2).  This is money that automatically gets taken out of my account and there's room after all expenses are met as well.  I don't budget myself or go crazy monitoring where my money went.  But I am excited at the increase and already have plans to get this number up to $4000/mon in 18 months.  Yes, I realize that a bulk of this money is W-2 and not from investing.  15-20% comes from REI.  But in a few years I'm going to have the cash to get into a large apartment.

How do you approach savings, planning, budgeting?  I see folks on here that want to invest in RE but have no money.  That has not been my experience.  I'm sure there's plenty (D Lindhal) that did it this way, but I like the Grant Cardone model: need money to invest? make more money!

Happy holidays and may everyone prosper in 2016!

Zach

Trevor Ewen · Answer

@Zach Adams

I think a personal finance creed is one of the most powerful things in real estate investing. It actually allows you to feel better about investment risk, when you realize the money you have invested would've otherwise been spent on lifestyle inflation.

If you can control your lifestyle and have money to your name, you have the best wealth building tool in the world: self-control.

One thing that I do find interesting is most of the very hardcore early-retirement types tend to avoid physical real estate as an asset class. They tend to exist in the index-fund products for the most part (ETFs, low cost mutual funds). My assessment is that real estate is very time intensive and management heavy, which is rarely ideal for someone hoping to travel the world un-tethered.

The valuable lesson is that you should really enjoy the process of real estate investing and providing value in properties. If you don't, it's probably too involved an asset to pursue.

As for our approach. We aim for 40% of our income. Retirement savings at my company is unbelievably generous. And we treat that as a separate and more conservative stream of investment. All real estate cashflow and capital gains are re-invested. All side work is re-invested. We can live easy off 60% of our income and everything else is ours to invest and learn.

Tanya F. · Answer

I'm also a big fan of MMM. In fact, that's how I found Bigger Pockets.

This year, I'm trying to save 100% of my W2 income and live off of our rental cash flow. We live quite frugally, anyway. When I didn't have any W2 income for part of last year, living off of the rental cash flow for a couple of months went pretty well. We'll see how it goes for an entire year. The plan is to cash in taxable investments if we need to dip into savings. Being in our mid 50's, we want all our savings in some kind of retirement acct. At our age it seems silly to have taxable investments, since 59 1/2 is soon. Through work, my 100% savings all go into retirement accts - some pretax and some Roth.

We'll see how that goes after a year. Maybe I'll do that even longer than a year.

Johnathan Alesso · Answer

I try to save as much as possible for future real estate investing.  I did not start out with much cash and while I have more of it now, I still retain the natural desire to save up.  That said, I make sure to spend on personal health and preventative medicine.  If we don't have our health, why are we planning so attentively to the future, right?

I've also accepted that I do best when I strike a balance of current enjoyment and future investment.  I spend a good amount of my disposable income on travel, but I pinch pennies on food, clothes and, really, everything else.

There's also the idea that living on less is actually more fulfilling.  I find this to be true for me.  The more I buy, the more I think I need.  The less I buy, the less I seem to need.

Great posts here!

Karen M. · Answer

Hi Zach,

You are so smart to know your savings rate.  My answer is, I don't know.  Perhaps this should be my 2016 New years resolution.

I am a fan of MMM and ERE and think it is valuable to understand needs vs. wants, and to spend on the things that bring the most happiness and usefulness to your life.

In 2015, we began working with monthly budgets, inspired by daily Dave Ramsey podcasts.  My husband and I are still practicing our budgeting skills - it is not easy and we are not in a real groove yet.  Speaking of which, time to start a January 2016 budget.

I have been pretty good about controlling spending, but we go in waves -- a month or two of simplicity and then a binge month.  And I don't mean BINGE, but we will loosen up.  For example, I bought 3 down coats on Ebay in anticipation of winter.  I don't need 3 down coats, and will probably sell one, but a nice warm coat or two is an OK thing to have. I have been hunting for a great pair of snow boots.  In our spending I am trying to get great satisfaction and value, and I am trying to bargain shop and buy used.

In 2015 we bought a very nice car for cash.  But we do not buy very many cars, and my husband is absolutely thrilled with the vehicle.   It could have been a down payment on a cheap house, or a very nice chunk of stock.  But he has a nice car now.  We allow ourselves to spend once in a while, and we follow Dave Ramsey's advice of buying used and buying at a level that fits our income level.

Nice car does not add up to a big savings rate.

We are doing OK and we are saving, but there is a lot further to go if we wanted to get to a maximum savings rate.  We could probably live on 50% of income or less. We do not have enough income to get down to 10%.  I am looking forward to MMM's 2015 spending report.  I should get back at that bare bones budget.  It is fun to practice, and challenging to practice.

Karen

Bryan Hancock · Answer

We focus more on accumulation percentages than savings.  Hyper focusing on "savings" is what W2 wage slaves do.  Balancing your focus on savings, making your investments work hard, and growing your income is what business owners do.  People that frequent the ERE and MMM spots in general think they know more about investing than they actually do.  There are some smart people on those sites, but many of them spent 10+ years in school making very little money, have little practical experience in the business world, and then preach to people on the sites like they know what they're talking about.

There is nothing wrong with a bit of lifestyle inflation either.  If you work hard you should live better than you did when you were in college.  The key is being able to balance the lifestyle creep with the desire to become financially independent sooner.  Where on this part of the spectrum one wishes to be is a completely personal decision.  As long as people are doing it with their eyes wide open then having people preach to them about what is "optimal" is pretty silly to me.

If you frequent BP you'll learn how to make your money work harder than the index fund investing that the Bogleheads, MMM, and ERE folks preach about.  Your situation and choices will be different than theirs most likely and you'll be trading a more actively managed investment style and the work implicit to this style for a better quality of living during the accumulation phase and less flexibility during "retirement" or financial independence.

We accumulate about 50% of everything we earn and live what would be considered an extravagant lifestyle by MMM or ERE standards.

Alexander Felice · Answer

I save only to build up cash to buy properties, so I don't really consider it "saving" as much as capital building.

I try to stack away as much as possible and live as absolutely frugal as I can. The result being that I can buy more properties and use the cashflow to increase capital further.

Aaron Mikottis · Answer

I currently make around $2900/mo net and my living expenses account for around $1000/mo. In that way, I can say that my savings rate is around 65%. I don't know if that's a fair assessment or not, because I'm not factoring in my student loan payments - I consider paying them off to be 'saving' money. If that doesn't count, then my savings rate is closer to 30%.

Christopher Brainard · Answer

@Zach Adams

Saving is great - it appears you have a good income and you're very responsible with your money. Most of us on this site are real estate investors and I doubt we track savings. We do, however, track net worth. I update mine monthly and enjoy watching that figure go up.

As far as a budget, I don't keep one anymore. I used to be really strict but money just isn't that tight, so I splurge here and there. I keep as little money in savings as possible, aside from a 9 month emergency fund. I try to keep my money working, instead of me working for the money.

-Christopher

Zach Adams · Answer

Trevor

Thanks for the response. I like the comment about self-control and is something I've learned as well.   Great point about the EREs avoiding RE. That's something I saw as well when I first started researching investing a few years. Definitely got some good ideas from them but never really subscribed to the index fund idea hook line and sinker. Glad BP came along :)

Zach

Zach Adams · Answer

Thanks for the reply.  I do a monthly net worth calculation as well.  I find it very helpful.  Also, I guess it was implied, but the whole reason for a SR calculation for me is to build capital for investing in RE.  I agree about not keeping money hoarded away.

Zach

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